Foreclosure

Highlights

  • Understand the causes of foreclosure.
  • Review the differences between judicial foreclosure and nonjudicial foreclosure.
  • Examine some ways to stop a foreclosure.
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The Causes and Effects of Foreclosure

Foreclosures are happening at record rates in America. Unfortunately, many homeowners have already experienced a foreclosure and many others face the grim reality that they can lose their home. Understandably, this is a stressful and disheartening experience.

Foreclosure is the last rung on the ladder. It is not a good thing for you or for your lender. Foreclosure is a complicated process that involves many legal and tax issues. It is important for you to understand the types of foreclosure, how the process works, and how it can affect you.

Causes of Foreclosure

The threat of foreclosure occurs when an inability to make the mortgage payment combines with a drop in property values. Many homeowners have been placed under financial stress due to mortgage loans that adjusted to a higher interest rate or a higher monthly payment. When the interest rate or the payment rose, many borrowers found their mortgage payments were no longer affordable. Other homeowners experienced a loss of income, making it impossible to pay the monthly mortgage payment.

A home mortgage foreclosure is the legal process through which your mortgage lender moves to take your home away from you and selling it to satisfy your unpaid mortgage. Foreclosure is almost always the result of a default on monthly payments.

Foreclosure Process

Your mortgage contract should state exactly how many payments you can miss before a Notice of Default is filed against you and the foreclosure can proceed. As a general guideline, it may take 90-150 days, but could be less in some states. It is important for you to keep in mind your lender very likely will not accept a partial payment on any of your mortgage monthly payments. Unlike a credit card, you cannot mail in a portion of your payment and remain in good standing. Mortgage payments are all or nothing. This also means that if you miss one payment, the next month you have to pay the current month and all arrears to catch up!

At the time foreclosure procedures begin, your lender will file a Notice of Default against you. This notice is recorded at the county recorder’s office in the county where your home is located. You will receive a copy of the notice, usually by Certified Mail. Read the notice carefully. Consider speaking with an experienced attorney if you receive a Notice of Default. It may specify a timeframe in which you are required to respond, if you wish to head off the foreclosure, or other details that a professional will help you understand.

There are two types of foreclosure: judicial and non-judicial foreclosure.

Judicial Foreclosure

Some states require a judicial foreclosure. A judicial foreclosure is a court-ordered, public legal process, the rules of which are set forth in state law. Judicial foreclosure laws vary from state to state. The foreclosure moves, sometimes very slowly, through the civil court system, similar to a lawsuit. Some jurisdictions are swamped with foreclosures, which increases the time it takes your lender to finalize a foreclosure against you. In states using a judicial foreclosure process, your lender does not have a forced power of sale clause, which means that lender must use the state's court system to foreclose.

Non-Judicial Foreclosure

A non-judicial foreclosure happens outside of court, using a procedure specified both by state law and your loan contract. If your loan terms specify that a foreclosure can take place without the need to go through the court system, then your lender can start the foreclosure process in 60-90 days. In that case, you have a fixed period of time, which varies state-by-state, to either sell the home or to negotiate another solution.

In both judicial foreclosure states and non-judicial foreclosure states, if you do not come to an acceptable accommodation with your lender, your lender then can initiate eviction proceedings, kick you out of your home, and auction it to the highest bidder.

You may find it difficult to work things out with your lender, once the situation has reached the level of foreclosure proceedings. Still, it can be possible. If someone can help you financially or if you have a valuable asset to sell, you can stop the foreclosure by paying back all arrears on your mortgage and any foreclosure fees, or required tax or insurance payments.

Quick Tip
Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.

Stopping Foreclosure

Forfeiting your home can be very hard emotionally. It also requires you to move and change your day-to-day life. You may want to do whatever you can to stay in your home for as long as possible. If there is no feasible way to stop foreclosure proceedings by catching up on your arrears, it makes sense for you to consider filing for bankruptcy.

A chapter 7 bankruptcy, which discharges certain debt obligations, will put the foreclosure on hold. Because a chapter 7 procedure usually only lasts a number of months, it is only a temporary fix. A chapter 13 bankruptcy, which re-organizes your debts, working out repayment terms between you and your creditors may be a more effective solution. Chapter 13 proceedings have payment plans that last as long as 5 years. Once you are under the supervision of the bankruptcy court, your lender needs permission from the court in order to move the foreclosure forward. The level of protection that bankruptcy provides can vary from state to state. Consult with an experienced bankruptcy attorney to learn more about this option.

After a foreclosure takes place, it is possible that you may be left with another problem. If your home sells for less than you owe, you may be financially responsible for the deficiency balance, which is the difference between what you owe and what the lender received in the sale of the home. Learn more about deficiency balances in the next article in this section.

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99 Comments

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  • EV
    Oct, 2013
    evelyne
    Detroit, MI
    A house has been foreclosed five years ago, there was an equity line with an amount due of $8000.00 which was written off... Can I do a quick claim deed to someone who wants to buy that house for the payment of the taxes due?? I would be helping someone in need and getting rid of the obligation, or would that put me back on the hook for the $8000.00, thank you
    0 Votes

    • BA
      Oct, 2013
      Bill
      The fact the creditor changed the status of the loan from its current accounts line to its bad-debt line does not, in itself, change the lender's rights. Put another way, the terms "write off" and "charge off" do not have the same definition as "forgiven" or "cancelled."

      I don't have enough information about your situation to answer your quitclaim deed question. It is possible the equity line lender still has an interest in the property. Therefore, it is possible that buying the property will also buy the $8,000 loan balance. On the other hand, your state may have anti-deficiency rules in place that make it illegal for the lender to try to collect the debt. Consult with a lawyer in your state who has mortgage or consumer law experience for a thorough analysis of the title before you buy so that you are fully aware of your potential liabilities.
      0 Votes

  • BA
    Apr, 2013
    Bruce
    Winter Haven, FL
    We filed BK chapter 7 in March of 2011. We elected not to include the house and car. Now we are still in financial trouble and are thinking of walking away. The car was reaffirmed shortly after the bk, However the house never was, and still shows on credit reports as part of the BK. Can we still walk and what are the problems going to be? Any suggestions?
    0 Votes

    • BA
      Apr, 2013
      Bill
      Under the US bankruptcy code, a debtor must include a list of all creditors and the amounts and nature of their claims in their schedules. I do not understand how it would have been possible for you to not include your home or auto loans in your bankruptcy filing. It is common for auto lenders to ask debtors to reaffirm their auto loans, as you hinted at in your comment. Under the bankruptcy code, a reaffirmation agreement is valid only when the debtor's lawyer also agrees to and signs the reaffirmation.

      I will assume you filed a complete list of your debts and obligations in your bankruptcy petition. You do not mention this, but I will assume your chapter 7 was discharged sometime in 2011 or early 2012, and that your personal liability for the home loan was part of the discharge. Your comment about your home loan's status on your credit reports seems to indicate your personal liability was discharged. If my string of assumptions is correct, then you can walk away from the home, in other words, allow a strategic default, and the lender will have no recourse against you.

      Consult with your bankruptcy lawyer to learn if my assumptions are correct. He or she should have explained the mortgage liability issue with you while you were filing out the bankruptcy schedules.

      You may not want to default and allow a foreclosure if you have plans to qualify for a home loan in the foreseeable future. That is because mortgage lenders look more favorably on short sales and deeds-in-lieu-of-foreclosure than they do foreclosures.
      0 Votes

  • KM
    Apr, 2013
    Karen
    Maryland Heights, MO
    My husband and I went through some bad times and few years ago. Filed a chapter 13, sent my payment into my Mortgage Company on time. However I mailed in the payment amount that was on the recording. Mortgage company received the payment ($72.00 short) Listed my payment as unallocated cash and relinquished themselves from the Chapter 13 (told me I should not listen to the recording) it wasn't updated in January. I have never received a form from my Mortgage company (my tax accountant says it is mandatory) stating what I owed and what they sold the house for. I believe they sold it for more than I owed. Wouldn't I get a form stating the loss I took to send in with my taxes? I have tried contacting the Bank many times, and have not received anything, nor has the IRS.
    0 Votes

    • BA
      Apr, 2013
      Bill
      I confess I do not understand the chain of events you described, and in particular what happened with your chapter 13. It appears you were in the middle of chapter 13 when an accounting error resulted in a foreclosure, though that's just a guess. Accordingly, it would be improper for me to offer any thoughts. Consult with your bankruptcy lawyer and ask him or her to describe exactly what happened here, and what rights you may have to file an action (a lawsuit) against the lender/mortgage servicer.

      Also ask your lawyer about your state's laws regarding what information a lender must disclose to a former homeowner/borrower following a foreclosure. Some states have no laws I can find on this matter, and others do.
      0 Votes

  • PC
    Feb, 2013
    Paul
    Haines City, FL
    Hi We live in the UK and bought a second home in Florida in 2006. Original price $320K. The house is now worth approx $200k and we owe $203k. The house costs us approx $1600 NET to maintain every month. We can no longer afford to make payments due to circumstances here in the UK and need the most cost effective exit strategy. We are not bother about out US credit ratings / etc as we no longer plan to purchase in the USA. However we do own a property in the UK and are concerned about keeping our primary residence over out heads. I look forward to reading your response.
    0 Votes

    • BA
      Feb, 2013
      Bill
      Talk to the mortgage servicer — the company you send payments to — about your financial situation, and ask about a deed in lieu of foreclosure or a short sale. These are your two most graceful alternatives to allowing a strategic default.

      The key issue for anyone facing a deed in lieu of foreclosure, short sale, or foreclosure is what happens to the deficiency balance. In an ideal situation from the borrower's perspective, the borrower negotiates a zero balance or forgiveness of the deficiency balance. Here, you are at a significant advantage because you reside outside of the US. It is possible legally, though impractical financially, for the lender to pursue you in the UK for a $3,000 debt. Therefore, it is likely the mortgage servicer will huff and puff and threaten to domesticate the deficiency balance in the UK, but the fact of the matter is doing so doesn't make sense.
      0 Votes

  • SF
    Dec, 2012
    Shirleen
    Hillsboro, OR
    The home I used to own with my mom and lived in for 20 years with her is about be forclosed upon as it was on a reverse mortgage under mom's name. The new mortgage company (BOA sold it to them over the past year) is offering a Deed-in-lieu of foreclosure proceedings, or a 95% of current market value, or just plain foreclosure. I know that this place is under loan value by around 100K and that it was under remodel/repair from black mold upon my mother's death. I am still living in the home and have been advised to speak with the mortgage company by the 21st as asked for in there letter stating forclosure process will begin on the 21st of Dec. How long will the forclosure take? I have been told that I could not purchase the home myself at the 95% rate as that is not legal? I would like to negotiate (sp) with them as I have found out that if I can get a job and stay on it for 6 months I would qualify for a housing loan and if there were some legal way to buy this home I could. I am thinking that I can not get 'key money' as the home is in disrepair due to the completely gutted bathroom. Heck I don't understand any of this but I have to call them within 5 days. Any info or advice would be appreciated.
    0 Votes

    • BA
      Dec, 2012
      Bill
      My first and last word here will be for you to consult with a lawyer who has real property, probate, or contracts experience.

      If the reverse mortgage is an FHA Home Equity Conversion Mortgage (HECM), then FHA regulations at 24 CFR 206.125(c) apply when the reverse mortgage borrower dies. 24 CFR 206.125(c) gives an heir the option to satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property. I do not understand why the lender would tell you the rule at 24 CFR 206.125(c) does not apply unless the reverse mortgage here is not an FHA HECM. Non-FHA reverse mortgages are rare, but not unheard of.

      You asked about the timing of a foreclosure, and indicated you reside in Oregon. The customary time for a foreclosure in Oregon is about 6 months. See the Bills.com resource Foreclosure Laws For All US States to learn more about your state.

      You mentioned qualifying for a mortgage. See the Bills.com mortgage affordability and payment calculators to learn if it is even in the realm of financial possibility to afford the house. Also, read what you need to qualify for a mortgage.

      As I mentioned at the start, consult with a lawyer immediately.
      0 Votes

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